Condominium association denied charitable status

Plain-English summary

A nonprofit homeowners association applied for recognition as a charitable organization. It managed a condominium complex and collected monthly fees from condominium owners to pay common costs. The IRS found that these activities directly benefited the private interests of the owners rather than serving the public. It concluded that the association failed the operational test under IRC § 501(c)(3). The proposed denial became final after the association did not protest within 30 days.

Ruling snapshot

• Question: Did operating a condominium association and covering owners' common costs qualify as charitable activity?
• Outcome: Denied, with the proposed adverse determination becoming final after no timely protest
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 69-175; Rev. Rul. 70-186; Rev. Rul. 75-286; Rev. Rul. 78-85; Ginsberg v. Commissioner, 46 T.C. 47 (1966)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

P.O. Box 2508
IRS Cincinnati, OH 45201

Date: May 5, 2016

Employer ID number:
Release Number: 201631014

Release Date: 7/29/2016 Contact person/ID number:
UIL Code: 501.32-00
501.33-00 Contact telephone number:

Form you must file:

Tax year:

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(3) of the
Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your
application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it
gave you 30 days to file a protest. Because we didn’t receive a protest within the required 30 days, the proposed
determination is now final.

Because you don’t qualify as a tax-exempt organization under Section 501(c)(3) of the Code, donors can’t
deduct contributions to you under Section 170 of the Code. You must file federal income tax returns for the tax
years listed at the top of this letter using the required form (also listed at the top of this letter) within 30 days of
this letter unless you request an extension of time to file.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) after deleting certain identifying information.
Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice
437 on how to notify us. If you agree with our deletions, you don’t need to take any further action.

We'll also notify the appropriate state officials of our determination by sending them a copy of this final letter
and the proposed determination letter (under Section 6104(c) of the Code). You should contact your state
officials if you have questions about how this determination will affect your state responsibilities and
requirements.

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at
1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Notice 437

Redacted Letter 4036, Proposed Adverse Determination Under IRC Section 501(c)(3)
Redacted Letter 4038, Final Adverse Determination Under IRC Section 501(c)(3) - No Protest

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Date: March 17, 2016

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:
X = Date 501.32-00
Y = State 501.33-00
Z = Date of incorporation

Dear

We considered your application for recognition of exemption from federal income tax under Section 501(a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you don’t qualify
for exemption under Section 501(c)(3) of the Code. This letter explains the basis for our conclusion. Please
keep it for your records.

Issues
Do you qualify for exemption under Section 501(c)(3) of the Code? No, for the reasons stated below.

Facts
You submitted Form 1023-EZ Streamline Application for Recognition of Exemption Under Section 501(c)(3) of
the Internal Revenue Code on X.

You attest that you were incorporated on Z in Y. You also attest that you have the necessary organizing
document, that your organizing document limits your purposes to one or more exempt purposes within the
meaning of Section 501(c)(3), that your organizing document does not expressly empower you to engage,
otherwise than as an insubstantial part of your activities that in themselves are not in furtherance of one or more
exempt purposes, that your organizing document contains the dissolution provision required under Section
501(c)(3), and that your organizing document contains the provisions required by Section 508(e) or that your
organizing document does not need to include the provisions required by Section 508(e) because you rely on the
operation of state law in your particular state to meet the requirements of Section 508(e).

You attest that you are organized and operated exclusively to further charitable purposes and that you have not
conducted and will not conduct prohibited activities under Section 501(c)(3).

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

Specifically, you attest you will:

• Refrain from supporting or opposing candidates in political campaigns in any way

• Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or
individuals

• Not further non-exempt purposes (such as purposes that benefit private interests) more than
insubstantially

• Not be organized or operated for the primary purpose of conducting a trade or business that is not related
to your exempt purpose(s)

• Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you
made a Section 501(h) election, not normally make expenditures in excess of expenditure limitations
outlined in Section 501(h)

• Not provide commercial-type insurance as a substantial part of your activities

During review of your application detailed information was requested supplemental to the above attestations.
This information shows that you are formed to manage a common interest development. You describe yourself
as a non-profit homeowners association. Specifically, you look after the well-being of a condominium complex
and collect monthly fees from owners of the condominiums to cover common costs.

Law

Section 501(c)(3) of the Code provides, in part, for the exemption from federal income tax of organizations
organized and operated exclusively for charitable, religious or educational purposes, no part of the net earnings
of which inures to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(c)(1) states that an organization will be regarded as "operated
exclusively" for one or more exempt purposes only if it engages primarily in activities which accomplish one or
more of such exempt purposes specified in Section 501(c)(3) of the Code. An organization will not be so
regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) states that an organization is not operated exclusively for one or
more exempt purposes unless it serves a public rather than a private interest. It must not be operated for the
benefit of designated individuals or the persons who created it.

Revenue Ruling 69-175, 1969-1 C.B. 149, describes an organization which was formed by parents of pupils
attending a private school. The organization provided bus transportation to and from the school for those
children whose parents belong to the organization. The organization did not qualify for exemption under
Section 501(c)(3) of the Code because it served a private rather than public interest.

Revenue Ruling 70-186, 1970-1 C.B. 128 held that a nonprofit organization formed to preserve and improve a
lake used extensively as a public recreational facility qualifies for exemption under Section 501(c)(3) of the
Code.

Revenue Ruling 75-286, 1975-2 C.B. 210 held that a nonprofit organization with membership limited to the
residents and business operators within a city block and formed to preserve and beautify the public areas in the
block, thereby benefiting the community as a whole as well as enhancing the members' property rights, will not
qualify for exemption under Section 501(c)(3) of Code because the organization was organized and operated for
the benefit of private interests by enhancing the value of members' property.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

Revenue Ruling 78-85, 1978-1 C.B. 150 held that a nonprofit organization with membership open to the general
public that was formed by residents of a city to help preserve, beautify, and maintain a public park located in the
city and whose support is derived from membership dues and contributions from the general public is operated
exclusively for charitable purposes and qualifies for exemption under Section 501(c)(3) of the Code.

In Benedict Ginsberg and Adele W. Ginsberg v. Commissioner, 46 T.C. 47, 1966, exemption was retroactively
revoked from a corporation organized to conduct the dredging of certain waterways. It was held that the
corporation was organized and operated primarily for the benefit of those persons owning property adjacent to
the waterways dredged rather than for public or charitable purposes.

Application of law

Your activities of managing the common interest development of a condominium complex and collecting
monthly fees from owners to cover common costs provides direct benefits to private individuals that are more
than insubstantial in nature. For this reason you are not operating exclusively for exempt purposes as described
in Treas. Reg. Section 1.501(c)(3)-1(c)(1). As a result, you do not satisfy the operational test requirement to be
recognized as exempt under Section 501(c)(3) of the Code, and are not described in Section 501(c)(3) of the
Code.

The group of parents in Rev. Rul. 69-175 provided a cooperative service for themselves and thus served their
own private interests. Like that organization, you were formed to provide benefits to your condominium
owners. In your case, your activities consist of operating a homeowner’s association for a condominium
complex by collecting monthly fees from owners of the condominiums to cover common costs. Looking after a
condominium complex and providing a mechanism for condominium owners to cover common costs serves a
private, rather than a public interest. Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) states that an organization is not
operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest.

You are dissimilar to the organizations described in Rev. Rul. 70-186 and 78-85 in the sense that you not
engaged in preserving or maintaining public property. Rather, you are similar to the organizations described in
Rev. Rul. 75-286 and in Benedict Ginsberg and Adele W. Ginsberg in that your activities serve private rather
than public interests. You activities are limited to collecting monthly fees from owners of the condominiums to
cover common costs. Covering the common cost of condominium owners serves their private interests. This is
not useful and beneficial to the general public as a whole.

Conclusion

Based on the above facts and analysis, you are not operated exclusively for a Section 501(c)(3) purpose because
you further the private interests of your members. Therefore, you do not qualify for exemption under Section
501(c)(3).

If you don’t agree
You have a right to file a protest if you don’t agree with our proposed adverse determination. To do so, you

must send a statement to us within 30 days of the date of this letter. The statement must include:

• Your name, address, employer identification number (EIN), and a daytime phone
number

• A copy of this letter highlighting the findings you disagree with

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

• An explanation of why you disagree, including any supporting documents
• The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization, or your authorized representative

• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement, including

accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

For authorized representatives:

Under penalties of perjury, I declare that I prepared this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you provided a basis for us to reconsider our determination. If
so, we'll continue to process your case considering the information you provided. If you haven’t provided a
basis for reconsideration, we’ll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court at a later date because
the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

Where to send your protest
Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable

address:
U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service
EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008
P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

You can also fax your statement and supporting documents to the fax number listed at the top of this letter. If
you fax your statement, please contact the person listed at the top of this letter to confirm that he or she received
it.

If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from you
within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on your
income tax filing requirements.

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If

you have questions, you can contact the person listed at the top of this letter.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W